All Forum Posts by: Stephanie Medellin

One other difference I didn't see mentioned above - FHA loans on 3-4 units will have to pass a self sufficiency test. This means that 75% of the rental income on all units must cover the PITI payment. This is a harder requirement to meet in certain markets.

No, I don't see 100% financing as realistic at all on investment properties. 

I've seen one hard money lender allowing 100% combined LTV, where they would finance up to half if the seller finances the other half. Normally lenders don't even want the CLTV to exceed a certain percentage. The rates and points were exorbitant - somewhere close to 15% with 5+ points. It didn't make sense.

Most hard money is based on low LTV. Lenders are willing to lend on less than perfect deals solely because there is equity available if the borrower defaults.

Owner occupied properties are a different story, and 100% is definitely possible in a lot of cases whether through down payment assistance or USDA or VA loans.

@Anna Catron  HELOCs are usually interest only during the draw period, so the formula is as simple as:

 (interest rate x principal balance) / 12 months

That's your approximate interest only payment.  I believe they calculate interest as a daily average on HELOCs, but it should be close enough to get a good idea of cost.

If the 13k is all W2 income and they approved up to $750,000, they may already be counting your rental income. Calculating rental income is not as straightforward as adding gross rental income to your income column and the PITI payment to your liabilities column.

Let's assume a 50% debt to income ratio, and rental income that completely offsets your rental PITI. That leaves you with roughly $6500 to spend on all other monthly expenses. This means that $6500 must cover:

-Housing (mortgage/land loan, property tax, property insurance, and HOA if applicable) and

-Any other monthly debt obligations (vehicle, credit card minimums, installment loans)  

With $2000 going toward a land payment, and another $1000 toward an auto loan, that only leaves $3500 to spend on your new HELOC payment. $3500 isn't enough to cover $750,000 @ 7.5%, which works out to $5244 fully amortized over 30 years (and that's not likely to be the calculation they are using). This makes me think you have good cash flow on your rentals that is being added to your monthly income.

I'd recommend asking their maximum DTI, then working backwards from there. Find out the income they are counting, as well as the debts. Also find out how they are calculating your qualifying payment on the HELOC. From there, you will be able to see if there's room to adjust any of the numbers to increase your borrowing power.

Another option is a credit line against any brokerage accounts you may have.  These function similar to HELOCs, but are secured against your other assets.

Find a contractor that's willing to do the work and be paid through closing.  If the seller doesn't close, they will owe the contractor (they could set up an arrangement to make payments, or maybe the contractor offers financing).  The important thing is that YOU are not the one obligated to pay for the repairs.  The repairs will be listed on the closing statement and the contractor can be paid directly at closing.

@Andrea Castor Is the 13k gross only rental income, a combination of rental income and other types of income, or solely other income?  This will make a difference in how your debt to income ratio is calculated.  

When your goal is to maximize borrowing power, you always want to keep all other payments as low as possible.  How can you achieve this?

If the lender allows debt to be paid off in order to help you qualify, the $1000 van payment (assuming this is a loan and not a lease) could be omitted by paying it off at closing.  The escrow or title company will issue a check directly from your credit line proceeds at closing, so the lender can ensure the debt is paid. 

If the land loan is a shorter term loan, such as a 15 year loan, it may make sense to roll that into your credit line too, resulting in a smaller payment for that remaining 200k.  

Alternatively, you could do a 1st lien cash out refinance, paying off the land loan and the van, and any other monthly liabilities while taking out the initial cash that you will need for your first project(s).  Again, the goal is to reduce your overall monthly payments by refinancing any outstanding debt into a longer term loan.  Once your first project is completed and refinanced, you could re-use that cash to complete your second project.  

A traditional cash out refinance would work here, and would probably be the most cost-effective loan option available, with a fixed rate that will (in most cases) be lower than a HELOC. The benefit with the HELOC is that you're only paying interest on the portion of the funds used, but these will likely carry higher rates on an investment property.

Since you already have a paid off home with equity available, I would not recommend a renovation loan unless the main home is in such disrepair that it can't qualify for a mortgage (i.e. roof leaks or major damage).  Even though renovation loans can take into account the "after repair value" of the home, you likely don't need the additional value to qualify.  You can also avoid the additional oversight of your project by the lender and you'll have more flexibility if you need to make changes throughout your project.

While I can't speak to tax strategies, you should be able to list the mortgage interest for investment properties on your schedule E, whether it's a HELOC or an equity loan / cash out refinance.

I can't tell from your post whether this is an investment property, or if your daughter will live in the home.  

From a lending perspective, if you won't be a borrower on the mortgage, the cash you're contributing will be viewed as a gift - even if you're also on title.

Conventional investment loans do not allow gifts for an investment property, but there are  non-QM loans that will allow gifts on an investment property.  You will need a loan that allows gifts.  As an alternative, you could be a co-borrower on the mortgage (assuming this doesn't negatively impact loan qualification), even if your daughter intends to make the payments.

If your daughter will live in the property, a gift is allowed on most loan programs.  

There are so many creative options for self employed borrowers, but it really depends on the details of the scenario and the way we document income.  How much are you planning to put down?  Will it be a long term rental?

Here are some options available for self employed borrowers:

Qualify based on 1 year of income rather than 2 years

Asset utilization loans where you qualify solely on your liquid assets, or we can use assets to make up the difference needed for qualifying income

DSCR loans where you only need to qualify based on the property you're purchasing (and it doesn't necessarily need to cash flow)

Bank statement programs where we look at average deposits instead of tax returns

P&L programs where we can calculate income based on your business profit & loss statement

All of these programs have varying rates, but LTV and credit score will have the most impact on your interest rate. I'd be happy to price out a few with more details, assuming it's in California.

PSA to any investors pursuing homes in default, especially where the owners still have equity: be aware of special rules within your state regarding contracts when the homeowner is in default.  These rules may not apply if you're buying as an owner occupant, but there may be additional protections for distressed property owners when an investor is buying the home.  Be sure you are using the correct contract for this scenario.